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More employees should be seeing longevity annuities in their 401(k) line-up, thanks to final rules announced by the Treasury Department’s J. Mark Iwry today. The rules are technical but the gist is that employees will now be able to convert part of their 401(k) or Individual Retirement Account balances into a longevity annuity with guaranteed lifetime payouts.

With a 401(k), you can retire with a large account balance, but it’s up to you to figure out how to spend it over your lifetime. Turning part of that balance into a guaranteed income stream for life can help you feel more secure in retirement. You don’t have to worry about overspending or underspending.

Under the new rules, a 401(k) or IRA can permit participants to use up to 25% of their account balance or $125,000 (whichever is less), to buy a longevity annuity without concerns about non-compliance with the age 70.5 minimum distribution requirements. The dollar limit will be adjusted for inflation in $10,000 increments. $125,000 actually goes a long way if you buy when you're 65 and start the annuity at 80.

SauSingGung-figurine of Longevity (Photo credit: Wikipedia)

Working through the RMD rules was impeding the uptake of longevity annuities in retirement accounts. Before the new rule, an employee would have to include the value of the annuity contract as part of the account balance when calculating required minimum distributions from their retirement accounts. Now under the new rule, the annuity contract is excluded from the account balance.

Another employee-friendly change pushed by the insurance industry is to allow what’s called a“return of premium” death benefit. A longevity annuity in a 401(k) or IRA can provide that, if purchasing retirees die before (or after) the age when the annuity begins, the premiums they paid but have not yet received as annuity payments, will be returned to their accounts. This means the initial investment can go to heirs.

Lifetime income products are evolving, and the availability of in-plan guarantees (products inside 401(ks)) is still in its infancy. The two main types of in-plan guarantees are longevity annuities (also known as deferred income annuities) and guaranteed lifetime withdrawal benefit (GLWB) annuities. A lifetime withdrawal benefit gives you some flexibility to stay in the market with a base guarantee. A longevity annuity allows you to buy a certain amount of income at a future date. Typically an employer offers one or the other.

The number of workers who have access to one of these two types of in-plan guarantees as part of their retirement plans grew to nearly 2.3 million, an increase of 28 percent compared to 2012, according to LIMRA, an insurance industry trade group. But only 49,900 workers elected an in-plan guarantee in 2013, up 5 percent from 2012.

The new rules will help introduce more workers to longevity annuities, but the thinking among employers is that they won't really take off until the Department of Labor acts on its proposal to require employers to provide lifetime income statements, says Joseph Adams, an employee benefits lawyer with McDermott Will & Emery in Chicago. The statements would show how much you’d get per month out of your 401(k) from say age 65 to 85, translating your account balance into a projected income stream. “Employees will say, ‘Holy cow! I’d better start saving more, and what happens when I reach 85,’” says Adams. That will in turn create demand for longevity annuities from employees.

Treasury and the DOL have been working on this together since 2010 when they issued a request for information on how 401(k)s could provide better lifetime income. The Treasury proposed the longevity annuity rules back in February 2012 that are now final. Last spring the DOL issued an advance notice of a proposed rulemaking on the lifetime income illustrations—not even a proposal. Nevertheless, some employers are providing these illustrations on their own.

If you’re considering a longevity annuity, Forbes’ William Baldwin explains the math here.